Ethics, compliance continue as priority for many companies, but there is room for improvement

Programs led by an individual reporting to either the CEO or the board or one of its committees substantially outperform those reporting to the general counsel

Ethics and compliance remain a priority for many companies, and there are some important common characteristics of businesses that scored high on a recent comparative study.

Some 65 percent of companies are seeing higher levels of overall compliance over the past three years, LRN's 2014 Ethics & Compliance Program Effectiveness Report said.

The report looks at progress on “key hallmarks” of effective programs as they were listed by the Securities and Exchange Commission and the Department of Justice. There is room for improvement, however. Less than half of all programs have made “substantial progress” on four of the ten hallmarks, the report adds.

LRN, an ethics advisory firm, has also released a Program Effectiveness Index (PEI), which relates to factors associated with an effective ethics and compliance program. Companies are ranked on a scale of 0 to 1, based on their ethics and compliance program effectiveness. The 2014 mean PEI score is 0.60. Aerospace and defense has the highest mean PEI score (0.70), and chemicals has the lowest (0.49). The index involves 180 companies located in different countries.

When it comes to issues related to general counsel, there is still the question if “the compliance function ought to report to the general counsel.” The report said most of the discussion on the issue relates to avoiding conflicts of interest.

“But the PEI analysis suggests there may be more to it than that,” the report said. “Programs led by an individual reporting to either the CEO (22 percent of the total) or the board or one of its committees (16 percent of the total) have average PEIs of 0.63, substantially outperforming those reporting to the general counsel (average PEI scores of 0.58.)” And when it comes to “more effective” programs, fewer report to the general counsel, and far more to the CEO or the board than at less effective programs.

In addition, a majority of compliance officers update boards two or four times a year, with 4 percent of respondents saying they do not give board members updates. There also is a “direct connection between companies that focus on culture and those that have highly effective ethics and compliance programs,” the report adds. Risk mitigation, leadership development, culture, values and innovation are found to be important variables. Wayne Brody, a senior advisor at LRN, said in a statement, "Our study shows that an investment in culture, where values, risk management and innovation are front and center, have significant and lasting economic impact on performance."

“The analysis makes clear that businesses focused on culture, on values, on risk management, and on innovation have very effective compliance programs. And such programs have very effective businesses,” the report adds.

Those companies which scored in the top quintile and recognize ethical conduct most often do so by giving awards (55 percent); giving recognition in team meetings (45 percent); giving recognition in company communications (42 percent); and through job promotions (23 percent).

Also, Brody said, "We find that those who run highly effective programs are two or three times more likely than others to measure their programs based on metrics tied to principles of validity, impact, practicality and value."

Middle management has a key role to play, as well, to promote ethics.  “If you lack middle management support you have a really rotten PEI index score,” Brody told The Wall Street Journal.


Further reading:

Mistakes and realities of implementing and executing effective compliance programs 

Ex-J.P. Morgan Asia executive arrested as officials investigate corruption, corporate hiring practices

Goldman Sachs is latest U.S. company to get investigated for FCPA concerns



Contributing Author

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Ed Silverstein

Ed Silverstein ( is a veteran freelance writer and and editor for magazines, websites and newspapers. He writes frequently for ALM Media's

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